The ongoing global trend towards further tightening of the property insurance market due to factors such as geopolitical risks, inflation, and natural disasters is also widely observed in the Spanish property insurance market. Particularly, rising claim costs resulting from climatic events such as droughts, wildfires, extreme temperatures, or flooding are expected to contribute to no relaxation in both worldwide and national markets.
For risks in Spain, our long-standing network partner, IberAssekuranz observes an increasingly stringent interpretation of contractual obligations and clauses in all local property policies. This applies regardless of whether they are purely local contracts or part of an international program’s fronting policies.
In particular, strict applications are affecting the automatic precaution (property) and leeway clause (post-event liability in business interruption), which are intended to accommodate in-year increases in insurance values during the insurance year (e.g., due to inflation, investments, or positive business developments).
Insured parties must, therefore, be even more vigilant than before in ensuring that the actual investments or gross profits (analogous to § 9FBUB) for the current insurance period are communicated to the insurer. The deadlines and reporting procedures vary depending on the policy and insurer. In essence, it is advisable to provide up-to-date figures ideally before the due date, but at the very least shortly after the renewal, or during the year in case of changes in the risk situation.
Should the insured party fail to report the current insurance sums within the deadline, corresponding precaution and post-event liability clauses are automatically suspended. This means that in the event of a claim, only the sums documented in the policy are insured without any precaution. The insured party may then quickly fall into underinsurance.
The situation becomes particularly problematic if the presently documented insurance sums were determined or established in the past. In the case of business interruption, waiting periods of 24 or 36 months significantly exacerbate the issue.
Example of business interruption claim handling:
Renewal documentation issued as of January 1st, 2023
Annual Gross Profit insured: €100,000,000 (based on audited business year 2021)
Period of indemnity: 24 months
Leeway Clause: +20% (+€20,000,000 annually)
This value must be communicated to the insurer within the following 30 days after the next renewal
“Real” Gross Profit figures based on:
Business Year 2022: €108,000,000
Budget figures 2023: €116,000,000
Budget figures 2024: €124,000,000
PD/BI loss as of July 1st, 2022, being a proportional and easily calculated BI:
2022 (50%): €54,000,000
2023 (100%): €116,000,000
2024 (50%): €62,000,000
SUM: €232,000,000
Case 1) The communication of actual figures has been done in time
- An endorsement has been issued for the insurance period 2022 based on an Annual Gross Profit difference of €8,000,000 x 20%, which means that the Leeway clause is still active.
- Consequently, for Year 2023, we have an insured annual value of €120,000,000, which would provide complete coverage for a potential BI claim.
Case 2) The communication of actual figures has NOT been done in time
- As no endorsement has been issued for the insurance period 2022, the Leeway clause is automatically suspended.
- Consequently, for Year 2023, we have an insured annual value of €100,000,000 only, which in our example would mean an underinsurance of €32,000,000.
In addition to the stricter interpretations of clauses in the private insurance market, IberAssurance and TRC would like to provide further information on the special situation and requirements of the locally mandatory pool coverage “Consorcio de Compensacion de Seguros.”
The pool standing behind Consorcio requires a detailed breakdown of current risk locations related to the ongoing insurance year and an allocation of insurance sums. Precaution and leeway apply to Consorcio as well, depending on the insurer’s interpretation and the contractually agreed provisions. Insufficient or unassigned insurance sums for risk locations can lead to problems in the event of a claim. Furthermore, the customer must fulfill the administrative requirements for the application of compensation payments and submit various documents in a timely manner.
Administrative requirements include, for example:
- Reporting the claim to Consorcio within 7 days after the policyholder becomes aware of the claim.
- The report must adhere to Consorcio’s prescribed format and requires proof of various documents (including a copy of the last premium invoice with payment proof within the payment period of 30 days from the due date for renewal policies / “Cash before Cover” for new policies); copies of insurance conditions, side letters, addendums, and more.
- For insurance solutions under the freedom to provide services, translations of policies and payment proof in the Spanish format may be required on a case-by-case basis.
Our Spanish partner broker, IberAssurance, has found that the negative impacts of outdated insurance sums on claim settlement may be reduced when dealing with international property or business interruption program policies. In this scenario, negotiations with the involved insurers and regulators are possible. However, in the case of a Consorcio claim, individual consideration and negotiation with external regulators are only possible to a limited extent.
Please clarify the extent to which clauses or DIC/DIL insurance coverage exists for Spanish risks in your FOS coverages or master agreements for global international programs. Generally, Consorcio risks are excluded.
If the insurance-related data regarding sums and locations are provided centrally from your headquarters in Germany, we request that you sensitize your client’s risk management accordingly and adjust the collection and communication of risk information specific to Spain.
In the case of decentralized provision of data for property insurance, the local Spanish broker will liaise with local management.
Excursus on Consorcio de Compensacion de Seguros
Consorcio was founded in 1954 to provide insurance coverage for “exceptional events.” Typically, the claims involve events that are considered difficult or nearly impossible to insure.
Since 1990, Consorcio has been an independent public-law entity subordinate to the Ministry of Economy and Finance.
Risks located in Spain must be insured within the framework of the Consorcio pool, and pool premiums must be paid. Contracts concluded outside the Spanish market under the freedom to provide services (FOS) are not exempt from this obligation!
For purely local insurance coverage as well as fronting policies within international programs, the collection and transfer of pool contributions are performed automatically by all Spanish insurers.
The Consorcio pool insures in Spain against natural disasters (with hail being excluded), as well as social unrest and terrorism.
The most affected insurance contracts include:
- Property insurance (private, commercial, or industrial risks, and in some cases, infrastructure projects)
- Motor vehicle comprehensive insurance
- Personal accident insurance
Events insured include:
- Natural disasters such as earthquakes, tidal waves, storm surges, floods, volcanic eruptions, hurricanes/cyclones exceeding 120 km/h, meteorites, or the fall of celestial bodies
- Events with social consequences such as terrorist acts, riots, rebellion, disturbances, and events caused by armed forces during peacetime.
